Merrill Lynch: Trouble In Paradise?

Dec 1, 2007 12:00 PM, Christina Mucciolo

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Merrill Lynch at a Glance:

Total client assets: $1.8 trillion

Number of advisors: 16,610

Average annualized revenue per advisor $794,702

Pretax profit margin: 26.0%

Mascot: Bull

Best management move: Acquiring First Republic Bank

Worst management move: A $2.3-billion third-quarter net loss and $8.4 billion, mostly in sub-prime and CDO write-downs.

It was a record-breaking year for Merrill Lynch. The firm recorded the worst loss ($2.3 billion) in its 93-year history in the third quarter, due in large part to $8.4 billion in write-downs related to exposure to sub-prime mortgages and collateralized debt obligations (CDOs). A week later, Merrill chairman and CEO Stan O'Neal “retired,” and Merrill shares are down by nearly 40 percent this year.

In early November, it was rumored that BlackRock's Chairman and founder, Larry Fink, was offered O'Neal's post. (Fink has strong ties to the brokerage since BlackRock took over Merrill's Proprietary Asset Management unit in 2006.) Less than two weeks later, CEO of NYSE Euronext, John Thain, agreed to take the top job at the firm instead.

Most Merrill reps aren't exactly fired up about Thain's succession: “Frankly, on this side of the business, we hope we have somebody competent, but it really doesn't have a big impact. It maybe moves things along, but it's not a ‘wow, we have a great person running the firm’,” one advisor says. But most of the firm's reps would have preferred Bob McCann, president of Global Wealth Management. Indeed, 21 top brokers wrote a letter to the board before Thain was selected, asking that the Global Private Client unit be represented at the presidential or co-presidential level and supporting McCann. (A poll on Registered Rep's website also showed that 39 percent of readers wanted McCann in the top slot.)

Still, Merrill's Global Wealth Management division is thriving: Global Private Client (which includes Investment Management) reported robust third-quarter pre-tax profits of $953 million, up 70 percent from a year ago, on $3.5 billion in net revenues. It also gathered $26 million in new assets during the period — surpassing everyone except Schwab. And 410 FAs were added to the ranks in the third quarter, bringing the total FA army to 16,610.

While our Broker Report Card survey took place long before the third quarter's bad news, the results are a testament to the unit's strength: Merrill's overall average rose to 8.6, putting it in third place behind Edward Jones and A.G. Edwards, which has been swallowed up by Wachovia. In fact, Merrill's score has been creeping steadily higher since 2004. As one advisor puts it, “I feel that over the last few years the firm has resurfaced as the superior financial services firm, and if I went anywhere else it would be like stepping down a little — like leaving the Yankees to play for someone else.”

Merrill reps are particularly happy about the quality of products Merrill offers. Merrill received a score of 9.2 in this category, the highest score it received for any category, and well above the all-firms average of 8.2. (For more on rep's love of products, see page 69.) Merrill reps are also exceedingly pleased with management, which got a score of 8.9 — again, well above the all-firms average of 8.4. Within that category, it took highest marks for public image (9.1) and overall ethics (9.0).

Let's hope the third-quarter (and maybe fourth) write-downs, and O'Neal's ouster, don't change that perception. So far, so good. Merrill reps seem to be a resilient bunch: “We look at what happened and we just chalk it up to, ‘Hey, business is business,’” says one rep. Ironically enough, Merrill received one of its weakest scores from reps on “risk management,” with an 8.2. Awfully prescient. Maybe the brokerage unit should be represented at the presidential level after all.